Chinese and foreign tourists view the Pudong financial district skyline from the historic Bund in Shanghai on Oct. 29, 2013. China's ruling Communist Party will hold a key four-day gathering early next month, that could serve as the venue for the announcement of far-reaching economic reforms. The Communist Party's third plenum traditionally sets the economic tone for the Chinese government's next five-year term. (Mark Ralston/AFP/Getty Images)

BEIJING — Three and a half decades after China veered from communism toward state-directed capitalism, Asia’s economic engine is running out of gas.

The Chinese economy is bogged down by an increasingly inefficient state sector and an explosion in debt. It has pretty much reached the limit of how much it can grow through exports, and its economic success is threatened by environmental disaster and social inequality.

On Saturday, President Xi Jinping will open a four-day gathering of 376 Communist Party bigwigs at Beijing’s heavily guarded Jingxi Hotel. What lies before them, according to Elizabeth Economy of the Council on Foreign Relations, is no less than “changing the fundamentals of how the Chinese economy operates.”

The implications of the meeting — known as the Third Plenum of the 18th Central Committee — are huge, not just for China and the survival of its Communist Party, but also for the rest of the world. If approved, measures to further open the economy and encourage Chinese consumers to spend more could rewrite the country’s story line and bring significant benefits for U.S. companies.

In China, the transformation of the once-socialist economy has produced average economic growth of about 10 percent a year over more than 30 years, lifting hundreds of millions of people out of poverty and raising China’s share of the global economy from about 2 percent in 1980 to 15 percent now, according to the ratings agency Fitch.

But economic growth is slowing, and analysts say there is an urgent need for reforms that were delayed during the past decade — among them, unleashing market forces, promoting innovation and reducing the role of the state, stimulating purchasing by Chinese consumers and reining in free-spending local governments.

“The plate is very full, and the dinner is getting cold,” said Patrick Chovanec, managing director of Silvercrest Asset Management in New York and a longtime China expert. “They have a lot of things to do, and all of them have reached a point where they can no longer be put off.”

Under China’s five-year political cycle, the first two plenary sessions of the party’s Central Committee manage top-level leadership appointments; the third traditionally sets the tone for policy, especially economic policy, under that new leadership.

In 1978, the Third Plenum was the occasion when — after the death of Mao Zedong and the toppling of the radical Gang of Four — Deng Xiaoping pushed through changes that launched China’s economic transformation.

Today, China’s boom is increasingly based on borrowing money from domestic savers at very low government-regulated interest rates and lending it lavishly to giant state-owned enterprises run by the Communist Party aristocracy; on depressing the currency and subsidizing energy costs to promote exports and industry; and on investing heavily in infrastructure but ignoring environmental costs in a quest for wealth.

Local governments kick farmers off their land with minimal compensation and reap vast rewards in property development to finance grandiose infrastructure plans, but ghost cities and half-empty ports suggest that not all the money has been spent wisely.

Imbalances in the economy are growing. The risk is that China will fall into what development economists call the ­“middle-income trap” — immensely successful in dragging its way out of poverty through debt-financed state investment but unable to make the transition to a rich, innovative and dynamic modern economy.

Limits of credit boom

Arthur Kroeber, a founding partner of the research firm GK Dragonomics, says China has done reasonably well at weaning itself off an excessive dependence on exports since the global financial crisis of 2007-08 undercut foreign demand for its goods.

But the recipe for success was a huge economic stimulus plan and a rapid expansion in lending to local governments and state-owned enterprises. Economists say that spending spree cannot continue forever.

“The problem to me is that they have reached the limits of being able to stimulate high rates of growth through infrastructure spending,” Kroeber said. “They need to think of other ways.”

“The process has also entrenched the position of state-owned enterprises and made them much more difficult to dislodge at a time when the return on their investments is plummeting,” he said.

The party’s top leaders have been aware of the problems for a decade, but no progress was made in addressing them under then-President Hu Jintao.

Last weekend, Xi promised a group of foreign experts that the Third Plenum would unveil “a blueprint of comprehensive reforms.” He has talked in recent months about reforms entering “the deep-water zone where tough challenges must be met.”

At an economic forum in September, Premier Li Keqiang promised to rely on “determination, like a brave warrior who cuts his wrists, to advance reforms.”

So far, though, the signs have been mixed, with credit continuing to expand rapidly and a much-vaunted new free-trade zone in Shanghai proving something of a disappointment, with few significant concessions to investors announced. With powerful figures and families at the top of the party’s leadership — as well as myriad local officials — profiting from the status quo, change will be difficult.

“There is a realization at the top level of what needs to change, but that realization has existed for the past decade as well,” CFR’s Economy said. “The real question is whether this new set of Chinese leaders can do a better job of implementing the necessary changes than their predecessors.”

China experts are divided about whether the slowdown will help focus attention on those changes or will instead make the process of adjustment so painful that leaders will continue to put it off until it is too late.

Some worry that the credit boom has reached dangerous proportions and that a decade or more of economic stagnation — a fate not unlike Japan’s — could result as more of the credit in the economy goes into rolling over bad debts. In April, Fitch downgraded its rating on China’s local currency debt; in October, the agency warned that the investment-driven economic model was unsustainable.

The Communist Party’s obsession with guaranteeing fast economic growth — which it sees as a pillar of its legitimacy — may make it harder for its leaders to abandon the debt- and investment-driven model of growth and relinquish control of the economy to market forces.

“They have got to get off that tiger, but they don’t know how,” Chovanec said.

Others, such as Kroeber and Nicholas Lardy of the Peterson Institute for International Economics in Washington, are more sanguine, saying that the party can gradually rein in credit without provoking an economic collapse. But they do not underestimate the need for decisive action — soon.

Few expectations

No one is expecting fireworks from the closed-door plenum, with a final statement likely to be long on promises and short on details.

Observers expect to hear talk of financial reform and pledges to fight corruption. There are likely to be some steps to encourage small and medium-size enterprises. There may even be talk of giving farmers more rights over collectively owned rural land.

“I am not expecting a lot of specifics,” Lardy said. “But I would want to see a fairly serious blueprint in which they prioritize things . . . and some sense of urgency.”

The real test, observers agree, will probably come in the months after the plenum, in terms of what is implemented.

“The problem now is not the direction,” said Chen Gong, founder of Anbound Consulting in Beijing. “The direction is clear, and no one dares stand against reform. The problem is how to reallocate the interests, and who should give up their interests.”